- By Vivek Kaul
I have recently started using Uber and absolutely love their service. The cabs are clean and air-conditioned. Over the long distance UberGo, the most basic service that the company has to offer, works out to be cheaper than the ubiquitous kaali-peeli taxi in Mumbai.
Further, in other cities where the auto-rickshaw drivers are a pain in the ass (not that they are not in Mumbai, but the degree is considerably lesser), Uber is a real saviour. I used it during recent trips to New Delhi and Bangalore and totally managed to avoid travelling by auto-rickshaws. At airports, one is forced to take a radio-taxi or a pre-paid service. These services work out to be terribly expensive.
Last week, while travelling from the Bangalore airport to the city, I booked an Uber. A distance of close to 50km cost me Rs 578, which was around 50% of what a radio-taxi would have cost me.
Similarly, while travelling from the New Delhi domestic airport terminal to the sub-city of Dwarka, after midnight, I paid only Rs 173, for a distance of around 12 km. A radio-taxi would have cost me at least Rs 450, which would have included a night charge as well as a parking charge.
Further, in other cities where the auto-rickshaw drivers are a pain in the ass (not that they are not in Mumbai, but the degree is considerably lesser), Uber is a real saviour. I used it during recent trips to New Delhi and Bangalore and totally managed to avoid travelling by auto-rickshaws. At airports, one is forced to take a radio-taxi or a pre-paid service. These services work out to be terribly expensive.
Last week, while travelling from the Bangalore airport to the city, I booked an Uber. A distance of close to 50km cost me Rs 578, which was around 50% of what a radio-taxi would have cost me.
Similarly, while travelling from the New Delhi domestic airport terminal to the sub-city of Dwarka, after midnight, I paid only Rs 173, for a distance of around 12 km. A radio-taxi would have cost me at least Rs 450, which would have included a night charge as well as a parking charge.
So, the question is how is Uber able to offer services at such low costs? How are their costs even lower than that of the Mumbai kaali-peeli?
In fact, Uber-Go is priced at Rs 8 per kilometre in Mumbai. Over and above this there is a base fare of Rs 45 and Rs 1 per minute for the total time for which the journey lasts, that needs to be paid. I have asked every Uber driver that I have travelled with (even drivers of their mid-level service called uberX) whether the price being charged by Uber was economically viable for them? And all of them have said no.
"So how do you make money then?" is my next question. "The company pays us an incentive for every pick-up," is the universal answer that I have received. I don't know what the exact amount of this incentive is because different drivers in different cities have given me different answers.
But what this tells us very clearly is that Uber is under-pricing its services. What Uber is doing in India is similar to what the dotcom companies did in the United States in the late 1990s and the early 2000s.
As Gary Smith writes in Standard Deviations-Flawed Assumptions, Tortured Data and Other Ways to Lie With Statistics: "A dotcom company proved it was a player not by making money, but by spending money, preferably other people's money...One rationale was to be the first-mover by getting big fast...The idea was that once people believe that your web site is the place to go to buy something, sell something, or learn something, you have a monopoly that can crush competition and reap profits."
The idea is to get people used to Uber and then gradually start raising the price. In fact, Uber is not the only company in the Indian e-commerce/mobile-commerce space which is following this strategy. Discount is at the heart of the so called Indian e-commerce revolution. And given this none of these companies like to talk about their net profit or even their 'real' revenues for that matter.
The e-commerce companies like to talk about their "gross merchandise value" instead of revenues. And what is that? It is essentially the sale price charged to the customer. So if a site selling airline tickets sells 10 tickets at an average price of Rs 5,000 each, then the gross merchandise value is Rs 50,000.
What is the problem with this approach? Howard Schilit explains this in Financial Shenanigans-How to Detect Accounting Gimmicks & Frauds in Financial Reports: "Some New Economy companies have stretched the limits on appropriate revenue recognition by recording an amount far in excess of the service fee." Schilit then explains the statement using numbers of a company called Priceline.com, which is in the business of selling air-tickets and bookings of hotel rooms (Something similar to what yatra.com, goibibo.com etc., do in India).
"For its efforts, Priceline.com pockets the difference between the amount received from the actual customer and the amount that Priceline.com has to pay to the airline or other supplier," writes Schilit.
Now how should it book its revenues? As Schlit writes: "Consider the following example. Priceline.com sells a $160 airline ticket to a customer for $200, keeping the $40 spread as its fee or the matchmaking service. What is Priceline's revenue for providing this service-$40 or $200? Priceline records the "grossed up" amount of $200, raising questions about the quality of its reported revenue."
Priceline should not have booked the amounts it owed to the airlines(or the hotels for that matter) as its own revenue simply because these "costs are merely a pass-through". Further, given that Priceline serves as an intermediary matching the airlines and hotels, with prospective customers, it should have been booking only its fee/commission as a revenue.
This is precisely how the concept of "gross merchandise value" works. And this is how Indian e-commerce companies have been jacking up their revenues. This is not surprising given that most of the big Indian e-commerce companies are owned by American investors. The model of reporting numbers that was followed during the American dotcom boom is now being followed in India.
A report in The Economic Times points out that some e-commerce companies have been pushing up their gross merchandise value by buying expensive goods being sold on their websites, themselves, under other names.
A higher gross merchandise value helps these companies get better valuations from investors, who are not exactly stupid, but seem to be egging the companies along in this game. The greater fool theory seems to be at work. Investors seem to be working with the belief that they will always be able to find a greater fool in the days to come to whom they can sell their investment and move on.
The problem is whenever the greater fool theory enters the game, things don't end well. Meanwhile, I will keep enjoying my Uber rides and so should you because for end-customers the deal is still very good. The good thing is that unlike the American dotcom bubble, the Indian retail investor is still not a part of this bubble.
But my guess is that this might change in the days to come as investors in e-commerce companies will try to exit their positions and force these companies to come up with initial public offerings. Ultimately, the retail investor will turn out to be the greatest fool-as is usually the case.
In fact, Uber-Go is priced at Rs 8 per kilometre in Mumbai. Over and above this there is a base fare of Rs 45 and Rs 1 per minute for the total time for which the journey lasts, that needs to be paid. I have asked every Uber driver that I have travelled with (even drivers of their mid-level service called uberX) whether the price being charged by Uber was economically viable for them? And all of them have said no.
"So how do you make money then?" is my next question. "The company pays us an incentive for every pick-up," is the universal answer that I have received. I don't know what the exact amount of this incentive is because different drivers in different cities have given me different answers.
But what this tells us very clearly is that Uber is under-pricing its services. What Uber is doing in India is similar to what the dotcom companies did in the United States in the late 1990s and the early 2000s.
As Gary Smith writes in Standard Deviations-Flawed Assumptions, Tortured Data and Other Ways to Lie With Statistics: "A dotcom company proved it was a player not by making money, but by spending money, preferably other people's money...One rationale was to be the first-mover by getting big fast...The idea was that once people believe that your web site is the place to go to buy something, sell something, or learn something, you have a monopoly that can crush competition and reap profits."
The idea is to get people used to Uber and then gradually start raising the price. In fact, Uber is not the only company in the Indian e-commerce/mobile-commerce space which is following this strategy. Discount is at the heart of the so called Indian e-commerce revolution. And given this none of these companies like to talk about their net profit or even their 'real' revenues for that matter.
The e-commerce companies like to talk about their "gross merchandise value" instead of revenues. And what is that? It is essentially the sale price charged to the customer. So if a site selling airline tickets sells 10 tickets at an average price of Rs 5,000 each, then the gross merchandise value is Rs 50,000.
What is the problem with this approach? Howard Schilit explains this in Financial Shenanigans-How to Detect Accounting Gimmicks & Frauds in Financial Reports: "Some New Economy companies have stretched the limits on appropriate revenue recognition by recording an amount far in excess of the service fee." Schilit then explains the statement using numbers of a company called Priceline.com, which is in the business of selling air-tickets and bookings of hotel rooms (Something similar to what yatra.com, goibibo.com etc., do in India).
"For its efforts, Priceline.com pockets the difference between the amount received from the actual customer and the amount that Priceline.com has to pay to the airline or other supplier," writes Schilit.
Now how should it book its revenues? As Schlit writes: "Consider the following example. Priceline.com sells a $160 airline ticket to a customer for $200, keeping the $40 spread as its fee or the matchmaking service. What is Priceline's revenue for providing this service-$40 or $200? Priceline records the "grossed up" amount of $200, raising questions about the quality of its reported revenue."
Priceline should not have booked the amounts it owed to the airlines(or the hotels for that matter) as its own revenue simply because these "costs are merely a pass-through". Further, given that Priceline serves as an intermediary matching the airlines and hotels, with prospective customers, it should have been booking only its fee/commission as a revenue.
This is precisely how the concept of "gross merchandise value" works. And this is how Indian e-commerce companies have been jacking up their revenues. This is not surprising given that most of the big Indian e-commerce companies are owned by American investors. The model of reporting numbers that was followed during the American dotcom boom is now being followed in India.
A report in The Economic Times points out that some e-commerce companies have been pushing up their gross merchandise value by buying expensive goods being sold on their websites, themselves, under other names.
A higher gross merchandise value helps these companies get better valuations from investors, who are not exactly stupid, but seem to be egging the companies along in this game. The greater fool theory seems to be at work. Investors seem to be working with the belief that they will always be able to find a greater fool in the days to come to whom they can sell their investment and move on.
The problem is whenever the greater fool theory enters the game, things don't end well. Meanwhile, I will keep enjoying my Uber rides and so should you because for end-customers the deal is still very good. The good thing is that unlike the American dotcom bubble, the Indian retail investor is still not a part of this bubble.
But my guess is that this might change in the days to come as investors in e-commerce companies will try to exit their positions and force these companies to come up with initial public offerings. Ultimately, the retail investor will turn out to be the greatest fool-as is usually the case.
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